Why to invest in Australian Mining sector ::

Overview

The Australian minerals industry is defined as covering the exploration and mining of minerals (including coal) and the associated minerals processing industry. The Mining division is expected to generate revenue of about $178.9 billion in 2010-11, up from $119.6 billion in 2005-06. Revenue is expected to grow by about 19% in 2010-11, having slumped by over 15% in the previous year in response to the global financial crisis. Despite that fall, revenue is expected to rise at an average annual rate of about 8.4% over the five years ending in 2010-11. The division is expected to generate over 7% of Australia's GDP in 2010-11. Moreover, and as described by leading economist Jim O’Neill from Goldman Sachs, Australia will be a chief beneficiary a “phenomenal” $US7.5 trillion expansion over the next decade.

Financial 2001- 10 (f)

Environmental

Social

% of GDP 8%

Employment

-direct (Feb 2010) 158,000

-indirect(est) 505,600

% Growth in capital

investment 08/09 30%

Value $35b

Exports $Ab

Coal and uranium 35.6

Iron ore 29

Other minerals 44.4

Mining services

Equipment 2.5

Total 111.50

% of total exports 48%

Largest employer of environmental professionals

Accounts for 3% of national water use with an economic value added of between $86,000/ML and $25,000/ML

Mining sites disturb <0.26% of Australia’s land mass and in 2007-2008 the industry is forecast to spend more than $200 million annually on rehabilitation of disturbed lands.

Accumulated provisions of nearly $3.5 billion for rehabilitation.

More than 420 Indigenous Land Agreements across 200 operations. Largest private sector employer of Indigenous Australians.

Companies contributed more than $7 billion in royalties as a part of $21 billion in State and federal taxes in the 2008/9 financial year- almost 50% more than 2007/8.

Invest more than $10 million on primary, secondary and tertiary education.

From one of the worst industrial safety records of any sector to one of the best. Our goal of zero fatalities and injuries remains our number one value and commitment.

Source: Minerals Council of Australia

Strong population growth is bolstering housing investment and consumer spending, while economic growth in China is boosting demand for Australia’s commodities.

Australia is the largest exporter of:

alumina; metallurgical coal; iron ore; and lead;

the second largest exporter of:

thermal coal and zinc

the third largest exporter of:

uranium.

The Australian economy has fared remarkably well through the global downturn. Australian banks had only limited exposure to risky US housing and financial assets, and the Federal Government’s fiscal stimulus was one of the largest in the world (as a percentage of GDP). The domestic economy was further boosted by China’s stimulus, which was close to the largest in the world and was easily the largest as a percentage of GDP. China’s stimulus resulted in commodities speculation and stockpiling, boosting prices and demand for Australian exports.

Trends

Commodities

The commodities boom of the past five years is forecast to continue in earnest as China follows the industrialisation path of many countries before it. The supply of commodities is expected to struggle to keep pace with demand, maintaining the higher prices of recent years. These high prices will create strong growth in Australia’s national income and encourage the continuation of strong investment in mining capacity, transportation and export infrastructure in Australia.

Energy

Black coal, which includes both thermal and metallurgical coal, is projected to remain Australia’s dominant energy export. The projected average annual growth rate of 2.4 per cent is based on expectations that global demand for coal will continue to increase in the period to 2029-30 as a result of increased demand for electricity and steel-making raw materials, particularly in emerging market economies in Asia. Australia’s dominant energy export, accounting for around 49 per cent of the total growth in Australian energy exports over the projection period.

The projected annual growth rate of 2.4 per cent is built on expectations that global demand for coal will continue to increase in the period to 2030 as a result of increased demand for electricity and steel-making raw materials, particularly in emerging market economies in Asia. Australia, with its abundant reserves of high-quality coal, has the potential to contribute significantly to meeting this increased demand, subject to adequate investment in mine and related infrastructure development. By 2029-30, Australian black coal exports are projected to reach the equivalent to around 450 million tonnes

Black coal exports will be supported by the expansion of infrastructure and mining capacity in New South Wales and Queensland over the projection period. In New South Wales, port capacity could increase by as much as 100 million tonnes with upgrades to the Kooragang Island and Newcastle Coal Infrastructure terminals.

Australia has significant volumes of natural gas that are increasingly being developed for domestic use and for export as LNG (Geoscience Australia and ABARE 2010). These augers well by increasing demand in the domestic market and increasing global demand for LNG.

LNG exports projected to increase significantly. By 2029-30, LNG exports from the western market has the potential to reach 73 million tonnes, which reflects an average annual growth rate over the projection period of 9 per cent. The development of a number of greenfield projects, including the Gorgon LNG, Ichthys, Wheatstone and Browse projects, is assumed to occur over the projection period.

A striking feature of the gas outlook in the eastern gas market is the increasing contribution of coal seam gas (CSG) to the gas production profile In 2007-08, CSG accounted for around 6 per cent of total gas consumption in Australia and 80 per cent in Queensland.

Production of CSG in Queensland and New South Wales is projected to continue its high growth trajectory; by 2029-30, when it would represent 88 per cent of gas production in the eastern gas market. A significant proportion of this CSG will be consumed domestically, supporting the projected growth in gas-fired electricity generation, particularly in Queensland and New South Wales. The significant gas resource base is capable of meeting both domestic and export demand over the next 20 years and beyond.

Australia’s Energy Exports

Source: ABARE 2010

Since 1987-88, the value of Australia’s energy exports has increased by an average of 7 per cent a year. Energy export earnings increased by 71 per cent in 2008-09 to reach close to $78 billion (ABARE 2009a). Coal is Australia’s largest energy export earner, with a value close to $55 billion in 2008-09, followed by LNG ($10 billion) and crude oil ($9 billion). While Australia is a net energy exporter, it is also a net importer of crude oil and refined petroleum products. In 2008-09, Australia’s imports of crude oil and refined products were $28 billion.

Recent deals

WA is a state with increased optimism about the resources industry and its allied manufacturing, services and logistics industries. This optimism is reflected in increased investment by the State Government in water and infrastructure resources and some breathtaking resource deals being signalled by global giants such as BHPBillton’s of just “preliminary” work on its next iron ore expansion in the state’s Pilbara region and the recent approval of the $43 billion Gorgon liquefies natural gas project – often described as a one-project stimulus package.

Western Australia is a major target for investors due to the ongoing strength of the mining industry and non-residential construction activities, the latest Access Economics Investment Monitor has reported.

Overall, Access Economics reports about $278.2 billion of definite projects, which are classified as either under construction or committed to start construction soon, equating to an increase of $4.9 billion from the September quarter. An estimated 145 projects worth $161 billion are currently set to commence in 2010, and also noted "two-thirds of these projects by value are mining projects.

Business investment is surging with some commentators waring a return to the skills shortage of two years ago. A September report by the WA Technology Industry & Advisory Council estimated the state would need 464,000 new workers by 2016, more than half of whom would need trade qualifications.

Growth and skills shortage

According to the report, WA would fall short by 190,000 people. One of the phenomena that were a feature of the earlier “boom” was that the big companies were active in poaching people from anywhere they could get them; bidding up wages and salaries as mining companies and contractors struggles to keep workers.

The Chamber of Minerals and Energy of Western Australia (CME) released a

in 2009. The report found that the minerals and energy sector should expect to experience rapid growth of both construction and output to 2014 and ongoing growth to 2020. It found that:

• State-wide demand for labour is projected to grow rapidly for the period 2008-2014, with a peak demand of 38,000 in 2012 due to coincidence of major construction projects. The majority of this growth is expected in the Pilbara and Mid West regions.

• The minerals and energy sector is expected to drive a population increase of up to 125,000 relative to 2007 levels by 2020, creating higher demand for community infrastructure in both regional towns and in Perth. Demand for these inputs and for other requirements such as transport will create strong demand for additional and upgraded infrastructure.

Queensland

The mining industry is the engine room of the Queensland economy. The industry and the communities it supports depend on infrastructure of all kinds to be able to operate efficiently and to reach their potential. The regions most affected include:

While coal dominates mining production in Queensland, the State is also a major producer of other minerals, including base metals, gold, phosphate, magnesite and bauxite. The North West Queensland Minerals Region is a world class base metals province. Queensland also produces oil and gas and has large resources with potential for shale oil production. There is excellent potential for uranium and coal seam gas to become significant export industries.

Investment opportunities

What can we conclude from all this macro data? The basic economic premise that capital investment in mining and infrastructure projects leads to what economist refer to as a multiplier effect. The stimulus that this investment brings to both to the immediate region where a project is taking place and the other regions of the State.

At this point in the Australian economic cycle WA is leading the nation into a high growth period and business activity is about to surge state wide. This will attract its fair share of investment and migration across from the under-performing states of Queensland and NSW. Many regions of WA are well positioned to benefit from the state’s imminent turbo-charged performance. Bottom line is: increased economic activity attracts superior population growth, which in turn leads to more building and retail activity and related services.

Broadly we can summarise some of the major infrastructure investment opportunities:

Upgrades and new roads to key development areas, plus town roads to accommodate truck traffic

Kimberley

Ports

Port inadequate to service resources growth

Export ports required for mineral and gas products, plus a supply base to support offshore operations

Kimberley

Developed land

Lack of developed land for housing and light industry will drive up cost and inhibit growth

Development and implementation of a comprehensive land development plan is required

Kimberley

Community Infrastructure

Inadequate community infrastructure to support population growth

Community infrastructure to support strong population growth and assist in attracting and retaining people

Pilbara

Developed land

Inadequate land availability in Pilbara towns to meet current and future demand for housing

Development and implementation of a comprehensive land development plan is required

Pilbara

Community Infrastructure

Education, childcare and health facilities and services inadequate to support community profile and meet needs of families.

Improvements to education to provide adequate schools and education services to meet needs of increased populations, with special attention to indigenous education and training Re-engineer the Pilbara health system to align capacity with demand Increase the amount, quality and availability of childcare

Pilbara

Ports

Port infrastructure requires major expansion to support big increases in export tonnage

Water supply and planning inadequate for future growth of industry and population

Develop integrated regional water plan to overcome future shortages for industry use

Regional Opportunities

WA is in many ways unique in the Australian business landscape. Due to its obvious mineral resources and vast regions it has widely distributed economic zones ranging from the capital Perth, east through to the goldfields, North West to the vast operations of the Pilbara & Kimberly and South West business markets such as Busselton and Albany.

The sheer scale and number of projects and infrastructure development going forward is impressive. Far from being dependent on one or two commodities WA and its regional economies are the beneficiaries of demand for oil and gas, iron ore, gold, nickel and minerals sands – as well as literally dozens of agri products.

Nickel as a case in point – hit hard during the GFC-driven downturn looks set to generate increased revenue for several WA regions, including Kambalda. Australia's nickel output is expected to continue falling in 2009-10 to around 144,000 tonnes, as the full-year impact of idled and permanently closed mines takes effect. By 2013-14, Australia's production is expected to be about 186,000 tonnes per year.

Other economic activity in the regions includes;

At Newman – Landcorps’ $50 Mil commitment to revitalising the Town Centre, as well as BHPs’ Sustainable Development Program which involves billions of dollars across its many operations

Kambalda West – the recent Airport & Rec Centre Developments and

Busselton – Infrastructure developments such as the Forrest Hwy and the potential development of a South West Domestic Airport.

Key players

These companies produce up to 75 per cent of Australia's mineral output including precious metals, base metals, light metals and iron ore, as well as energy materials such as coal.